Don’t Assume it is not a Good Time to Exit

I have been hearing of an increase in the number of people selling their businesses over the past few months.  Financially strong companies and cash rich investors looking for good acquisitions are starting to move in the market.

Since it is a buyers’ market right now, you need to set realistic expectations going into any discussions on selling your business.  From CNNMoney.com:

Of course, if you want to sell your company right now, expect it to fetch a lower price.

“Investment bankers say that valuations have dipped from a year ago by multiples of one-half to one point,” [John] Brown, [president of Business Enterprise Institute] says. “So if businesses were selling for six times EBITDA [earnings before interest, taxes, depreciation and amortization], today it’s five or 5½ times.”

What I am hearing is about the same drop in earnings multiples — about a one point drop.  However, most of the deals I have been seeing are running 3-4 times EBITDA, down from 4-5 times EBITDA a couple of years ago.

What does that mean?  Just like your home value, your business value has dropped 20-25% all things being equal.

But remember — the other part of the valuation equation is the profitability of the business measured by EBITDA.  Most entrepreneurs have reported a significant drop in their profit margins over the past year.  So that means that the drop in value could become much greater than 20-25% if profits are also down.

My advice:

  1. Understand what drives the value of your business.  It is most often some multiple of EBITDA.  The most common range historically has been 3-8 times.  What multiple you are likely to get is based on your projected growth, the health of your industry, the strength of your customer base into the future, and specific strategic advantages that you may be able to offer the buyer.  Currently, most multiples are 2-5 times EBITDA.
  2. Know your number.  If you need a certain amount of money from your business to retire, have that number in mind going in.  If the market is not supporting that value right now, you might want to wait until it does.  Use that time to improve your EBITDA so that when the economy picks up you will have an even greater value.
  3. Seek expert advice.  Work with your CPA and an attorney who specializes in Mergers and Acquisitions to understand the process and to help set realistic expectations.  You will have to invest some money up front, but it is money well spent.
  4. Realize that deals change.  Once the buyer gets into due diligence the price may drop.  Once they learn more about your business they may lower their projections for what your business can do in the future.  Be prepared for this, and know how much you are willing to go down ahead of time.  Be ready to walk away if the price they are willing to pay drops too much.  Don’t let your emotions lead you to take an overly discounted price — buyers can smell desperation and will use that to their advantage by trying to drive down the price during due diligence.

The odds are that about one out of fifty inquiries about buying a business will lead to an actual closing.  Keep that in mind right up until the deal is closed.  I have seen more than one deal collapse at the closing table.  Keep a level head and don’t spend the money until you actually have it in hand.  In fact, I recommend that you should not even dream about how you’ll spend it until you get it.